Thursday, March 29, 2007

My Click Fraud Theory

With the astounding growth of auction-based pay-per-click (PPC) advertising led by Google and Yahoo over the past several years, there is a great deal of discussion about click fraud. I think most people are completely missing the point. Those who are complaining about the issue really have nothing to complain about. Bizarrely, those who are getting screwed haven’t even uttered a peep.

Click fraud takes place when someone clicks on a PPC ad with no real intent of actually following the link. The result, of course, is that an advertiser has to pay for a bogus click. Many advertisers are complaining about being charged for bogus clicks and are even demanding refunds. Somehow they managed to force Yahoo to settle a lawsuit for about $5 million and Google actually coughed up $90 million in a similar instance.

This baffles me because any reasonably sophisticated advertiser shouldn’t really care about click fraud. Why? Because if they’re using any of the dozens of off-the-shelf tools to measure their PPC ad conversion rates, they would be automatically lowering their PPC bids to maintain an acceptable ROI. An advertiser simply shouldn’t care if he pays $1 per click for 10 clicks that yield 10% conversion and a single customer or if he pays $0.50 per click for 20 clicks that yield 5% conversion and a single customer. In either case, the advertiser has paid $10 to land a new customer.

Given the real-time tracking capabilities inherent in auction-based PPC, click fraud gets priced into the equation automatically. In my example above, the bogus clicks drove conversion down by 50% (from 10% to 5%), and advertisers adjusted their bids from $1 to $0.50 per click. Yes, in theory the advertiser may suffer temporarily from fraudulent clicks before he has a chance to adjust his bid downward to compensate for the lower conversion rate, but today’s automated systems figure this out pretty quickly. Any real damage to the advertiser is inconsequential.

So why are advertisers complaining? I don’t get it. Perhaps they haven’t all figured out how easy it is to use tools from search engine marketing (SEM) experts such as Efficient Frontier, SearchRev, iCrossing, iProspect (or many, many others). These SEM experts offer reasonably cheap software to solve the problem through automated bidding.

Perhaps some advertisers believe only their ads are being clicked fraudulently. Click fraud targeting a specific advertiser, does, in fact, hurt that advertiser. He can reduce his bid to maintain his conversion rate and ROI, but now he will get a much lower number of clicks because his competitors can afford to bid higher if they aren't suffering from the same click fraud. Though I acknowledge that advertiser-targeted click fraud is possible, I believe most click fraudsters are just trying to make money for a certain publisher rather than trying to deplete the ad budget of a certain competitor. So, I'm at a loss to explain why advertisers seem to care so much about click fraud.

Even more confounding, however, is that the companies who are really getting screwed haven't started screaming about it. In fact, we haven't heard anything from them. The companies on the losing end of click fraud are high quality web site publishers. When an unscrupulous publisher engages in click fraud to increase revenues, the result is reduced conversion rates for advertisers, who, naturally, lower their bids. Because of the way most advertisers participate in Google and Yahoo PPC auctions, when they reduce their bids, the reduction applies to every publisher in the Google and Yahoo networks.

If publisher A is engaging in click fraud, which causes lower PPC bids from advertisers, publisher B gets screwed. Publisher B doesn't generate any additional clicks, but now he's getting less revenue for each click. In a sense, publisher A just stole money from publisher B. My theory is that the publisher getting screwed the most is probably AOL.

I suppose it's not too surprising that high quality publishers aren't complaining because it's virtually impossible to detect this phenomenon. This is especially true because Google provides publishers with such a minimal amount of information about their advertising performance. Perhaps one reason Google is holding on so tightly to the lack of transparency in its system relates to keeping click fraud off the agenda of high quality publishers.

12 comments:

Jeremy, you raise a good point and probably the reason that high-quality, scrupulous publishers haven't said anything thus far is the same reason honest retail shoppers don't all complain about shoplifters - it's such an indirect effect. Same with CC fraud, same w/ ID theft, same w/ tax evasion...

As with most phenomena, the thing most important is the _perception_ of what's occurring. Google clearly sees advertisers feeling like they're getting screwed (even though the automated bidding tools exist to nullify this as you point out) but they have to do something. So they're delving into the CPA model now to tie the cost to an action. If I were CJ.com I would be thinking about what my next business will be as the Google steamroller is headed their way.

Sean, you're right that the click fraud effect is indirect much like credit card fraud. And I agree that perception is often more important than reality. Both of those rules of thumb generally apply to individual consumers. I would have expected something different from large, sophisticated companies like AOL. They should have figured out that they are getting screwed by click fraud, and unlike individual consumers that face higher prices because of credit card fraud but don't have sufficient clout to do anything about it, a large publisher like AOL can certainly impact the way Google and Yahoo do business if it chooses to do so.

Jeremy, Finally someone has put in writing what I have been saying all along. Click Fraud is inevitable in PPC advertising. As an advertiser on Google I will always click on my competitors to see what their pricing is, and what their website looks like. I don't click on them to sink their budget, but just to size them up. There is no way for anyone to know my intentions for clicking on all of them. Google and Yahoo both have fraud filters in place to weed out obvious bad clicks, such as clicking on ad twice in a row, or clicking multiple times within a certain time frame. Outside of the obvious it’s nearly impossible to predict or catch it. So we lower our bids to take into consideration that it does happen, and move on. there is a reason the word insurance has a $6.00 bid on Google a $5.50 bid on Yahoo and a $0.40 cpc bid on Findwhat.com. It all comes down to conversion rate. If the conversion rate goes up so does the bid. If the conversion rate goes down, so does the bid.

Jeremy, If click fraud reduced conversion by 50% and your solution is to reduce ad spend by 50%.... You will still have 50% waste. Your cpc adspend doesn't discriminate between good and bad clicks so your are still wasting 50% of your budget.

As a direct marketer, if your goal is to acquire customers for $10 each, it makes no difference whether you buy 10 clicks for $1 each and then one of those clicks becomes a customer or if you buy 20 clicks for $0.50 each and then one of those clicks becomes a customer.

My argument is that advertisers who experience click fraud will get more clicks and will pay less for each click, but in the end they'll have paid the same total dollars and they'll have acquired the same number of real customers. In my examples above, both advertisers paid $10 and acquired one new customer. The fact that the second advertiser spent half his money on bogus clicks is irrelevant.

The only losers from click fraud are the legitimate publishers who have no click fraud on their sites. They are making half as much money as they should. Yet, ironically, they have not been complaining.

You need to get a little closer to how PPC search actually works... your logic is a couple of years outdated. And, in some cases, just plain wrong.

Google/YSM factor in CTR not only into placement (ranking) but into CPC as well. So, someone clicking on your ad and only your ad doesn't actually cost you your CPC x the number of clicks, because they will have also LOWERED YOUR CPC. In some cases, the CPC effect on cost is stronger than the additional paid click % effect... meaning click fraud of this type can *help*.

I've seen more than a few great PPC click on their own ads when starting a campaign... mainly to generate quick positive history and avoid the so-called "google death spiral".

Second, you seem to miss the fact that while your logic would apply to a scenario where all clicks are worth the same (because conversions rates are the same without fraud), but that simply isn't the case.

The bidding tools you speak of have a hard time breaking up between content sources. If your conversion rate is 5% on one type of traffic, and 10% on other types, but your bidding tool only sees the average and bids accordingly (assuming a 7.5% conversion rate, lets say). This means you are overpaying for some conversions, and underpaying for others. In short, you are NOT optimized.

This is partially because of engine limitations, and partially because Google doesn't always give you 100% of the picture.... because they profit from the mistake.

The engine companies try to be a magical solution for all, but, in their efforts to become a one-size-fits-all solution, they leave a LOT of money on the table.

Its mistakes in logic like this that allowed Efficient Frontier to raise money... and they've pretty much hit a brick wall.

Anonymous, I wish you would have posted with a real name. You claim that savvy PPC advertisers actually click on their own ads to game the Google/Yahoo systems? I would be quite interested to see data that supports this as a smart advertiser strategy.

The WSJ had an article about eON buying 65,000 keywords, netting millions of visits per month for a year, and yielding a few hundred thousand repeat users. I think VC's and SMB's are getting screwed. Just my opinion.

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